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When to Fire a CEO: Optimal Termination in Dynamic Contracts

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Abstract

The repeated agency model has been widely applied to a number of interesting and important problems in economics, though in many instances, the fact that the standard model generates transient dynamics limits the usefulness of the results obtained from the model for the simple reason that purely transient dynamc phenomena are empirically irrelevant since they cannot be systematically observed and studied. \ In this paper, we show to embed the standard long-term contracting model in an economic environment in which the inherently transient dynamics of the model are transformed into dyanmics which are stationary and ergodic. \ We then use the model to study CEO termination and issues of corporate takeover.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2002-E5.

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Handle: RePEc:cmu:gsiawp:-397111066

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Web page: http://www.tepper.cmu.edu/

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  1. Wang, Cheng, 1997. "Incentives, CEO Compensation, and Shareholder Wealth in a Dynamic Agency Model," Journal of Economic Theory, Elsevier, vol. 76(1), pages 72-105, September.
  2. Wang, Cheng, 1997. "Incentives, CEO Compensation and Shareholder Wealth in a Dynamic Agency Model," Staff General Research Papers 5170, Iowa State University, Department of Economics.
  3. Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
  4. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  5. Phelan Christopher, 1995. "Repeated Moral Hazard and One-Sided Commitment," Journal of Economic Theory, Elsevier, vol. 66(2), pages 488-506, August.
  6. Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
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Cited by:
  1. Ohlendorf, Susanne & Schmitz, Patrick W., 2008. "Repeated Moral Hazard, Limited Liability, and Renegotiation," CEPR Discussion Papers 6725, C.E.P.R. Discussion Papers.
  2. Giat, Yahel & Subramanian, Ajay, 2013. "Dynamic contracting under imperfect public information and asymmetric beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2833-2861.
  3. Ronald W. Anderson & Maria Cecilia Bustamante & Stéphane Guibaud, 2012. "Agency, firm growth, and managerial turnover," LSE Research Online Documents on Economics 43144, London School of Economics and Political Science, LSE Library.
  4. Fabel, Oliver & Kolmar, Martin, 2012. "Do parachutes discipline managers? An analysis of takeover battles," International Review of Law and Economics, Elsevier, vol. 32(2), pages 224-232.
  5. Bushman, Robert & Dai, Zhonglan & Wang, Xue, 2010. "Risk and CEO turnover," Journal of Financial Economics, Elsevier, vol. 96(3), pages 381-398, June.
  6. Wang, Cheng, 2005. "Termination of Dynamic Contracts in an Equilibrium Labor Market Model," Staff General Research Papers 12403, Iowa State University, Department of Economics.
  7. Keiichi Hori & Hiroshi Osano, 2013. "Managerial Incentives and the Role of Advisors in the Continuous-Time Agency Model," Review of Financial Studies, Society for Financial Studies, vol. 26(10), pages 2620-2647.
  8. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Wang, Cheng, 2006. "Equilibrium Layoff As Termination of a Dynamic Contract," Staff General Research Papers 12704, Iowa State University, Department of Economics.
  10. Josepa Miquel-Florensa, 2013. "Dynamic contractual incentives in the face of a Samaritans’s dilemma," Theory and Decision, Springer, vol. 74(1), pages 151-166, January.
  11. Casamatta, Catherine & Guembel, Alexander, 2007. "Managerial Legacies, Entrenchment and Strategic Inertia," IDEI Working Papers 442, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. Wang, Cheng, 2011. "Termination of dynamic contracts in an equilibrium labor market model," Journal of Economic Theory, Elsevier, vol. 146(1), pages 74-110, January.
  13. Ohlendorf, Susanne & Schmitz, Patrick W., 2011. "Repeated moral hazard and contracts with memory: The case of risk-neutrality," MPRA Paper 28823, University Library of Munich, Germany.
  14. Martinez, Leonardo, 2009. "A theory of political cycles," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1166-1186, May.
  15. Oliver Fabel & Martin Kolmar, 2007. "On 'Golden Parachutes' as Manager Discipline," TWI Research Paper Series 17, Thurgauer Wirtschaftsinstitut, Universität Konstanz.
  16. Cheng Wang, 2012. "Optimal Self-enforcing and Termination," 2012 Meeting Papers 433, Society for Economic Dynamics.
  17. Leonardo Martinez, 2009. "Reputation, career concerns, and job assignments," Working Paper 06-01, Federal Reserve Bank of Richmond.
  18. Jin, Yu, 2010. "Credit Termination and the Technology Bubbles," MPRA Paper 29010, University Library of Munich, Germany.
  19. Ulf Axelson & Philip Bond, 2011. "Investment banking careers: An equilibrium theory of overpaid jobs," FMG Discussion Papers dp690, Financial Markets Group.

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